Abstract
Innovation is regarded as a critical source of competitive advantage. While the literature examines various firm, sector and country- specific determinants of innovation such as competition, networks or human capital, little is known about how institutional elements stimulate or inhibit firms to innovate. This study examines the impact of corruption, proxied by bribes, on firm innovation using responses from 7,000 firms in 30 emerging markets that exhibit significant heterogeneity in terms of both bribing practices and innovative performance. The empirical results show that: (1) bribes have a positive effect on firm innovation by “greasing” the regulatory apparatus to facilitate the introduction of innovative products to markets; (2) local arbitrariness, defined as the dispersion of individual firm bribes within a sector-region-city unit, has a negative impact on firm innovation, increasing the financial burden and informational asymmetries that firms face in their local environments; and (3) the efficiency of bribes is mitigated by the quality of formal (control of corruption) and informal (trust) institutions. These findings augment the existing literature by providing new insights into the relationship between firm innovation, bribery and institutional background.
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